When Bo Simmons, the founder and president of Cool Blue Interactive, moved his company to a new office in another part of Atlanta a few years ago, he decided it was time to upgrade his communication service. Simmons felt his existing phone bill was too high. And that his high-speed DSL Internet connection was spotty.

A friend told Simmons about an offering from a company called Cbeyond, a communications-as-a-service vendor that offered low-cost telecommunications, Internet service and a package of applications including Web conference and e-faxing, all on a hosted basis Simmons checked it out and signed on with Cbeyond. He got all the communications and applications he wanted for about $535 a month, $200 less than he had been paying. "I got more product for less money," he says.

Cool Blue, which is a nine-person Web design firm, isn't alone in turning to a communications-as-a-service (CaaS) vendor. Small and midsize businesses across the country are being attracted to the bundles of local and long distance calling, Web access, teleconferencing, instant messaging and other applications offered by Cbeyond, 8x8, CallTower, M5 Networks, Smoothstone, and other CaaS vendors.

Market research company Gartner, which defines CaaS as value-added Internet Protocol telephony services, recently said that it expects the market to hit $251.9 million this year—a 37.6% increase over last year—and to balloon to $2.3 billion by 2011.

The Travel Authority, which claims to be the largest affiliate in the American Express Travel Network, is typical of the businesses making the switch to CaaS. Last year it signed on with Smoothstone for a suite of products and services the vendor packaged together specifically for the travel industry. It included voice over IP, integration with the Global Distribution System reservation network, support for home-based agents, and continuity and disaster recover features. The Travel Authority deployed the system to 45 retail locations and its five call centers.

Lee Thomas, the company's executive vice president, wouldn't specify how much he had been paying, but says his current Smoothstone bill is 50% lower. "It's been a significant enhancement, a significant cost savings," he says.

Prices can vary depending on the package, but vendors typically offer their services at about $50 a seat, says Will Stofega, research manager of IDC's voice over IP services. And vendors with higher prices, such as CallTower, which charges about $100 a seat, throw in T1 connections and other extras.

But small and midsize companies are being drawn to CaaS offerings for more than just cost savings. Customers say they like the easy provisioning of lines, the on-demand availability of features and upgrades, the freedom of not having to worry about on-premise equipment and staff, and the service and support.

Keith Trawick, acting CIO at the New York Health & Racquet Club, which runs 10 fitness centers in Manhattan, signed on with M5 earlier this year for voice and data services, including fax-to-email and voice-to-text applications. Trawick said he switched over from MCI because he liked M5's network reliability and support.

The fitness club is heavily dependent on its communications system to run its business and, with MCI, he had experience outages. M5, he said, has been near flawless. "Their ability to deliver the product is the most important aspect," he says.

CaaS vendors say their market is similar to the software-as-a-service market, in which vendors such as Salesforce.com offer customer relationship management software and other applications on a hosted basis. And, just as the SaaS market has gained traction in the past few years, they say CaaS will experience similar acceptance.

"In the next 10-15 years, small business will not be purchasing phone systems," said Elizabeth Vanneste, M5's chief marketing officer. It won't make sense, she said, for companies to buy and maintain communications technology for five to seven years, especially when they may not have the expertise to staff and maintain it.

Still, CaaS vendors face a few challenges. For one, CaaS is a relatively new market and many of the vendors are young. As in any emerging market, "some [vendors] will thrive and some will be absorbed or go out of business," Gartner analyst Daniel O'Connell says.

Another drawback is that many CaaS companies offer only regional services. Atlanta-based Cbeyond, for instance, has been doing business in just a handful of cities, including Chicago, Dallas-Fort Worth, Houston, Denver and Los Angeles. (Just this month, it added Detroit.)

Need for Customization

There's also the question of whether vendors can tailor their packages. Lots of small and midsize companies want to tie their communications systems into their existing applications, such as their customer relationship management system. But the question they ask the CaaS vendors, IDC's Stofega says, "is can you really, really customize this stuff?" Stofega, however, said that most vendors are getting good at fitting their offerings to specific needs, and that customization is becoming less of an issue.

And, of course, any IP service is only as good as the Internet connection. The New York Health & Racquet Club's Trawick, for instance, says construction and accidents in and around New York can cut off Internet service at any time. But, he says, you just need to be prepared. He says M5 automatically reroutes his calls if there's a service disruption. And he backed up the company with DSL Internet service from another carrier.

Still, with its promise of increased flexibility, greater reliability, and lower costs, most agree that a migration in the midsize market is happening toward CaaS. "We're really starting to see a shift in the way telecommunications services are consumed," IDC's Stofega says.